With private equity fund sizes steadily increasing, anecdotal evidence from both investors and fund managers suggests that the lower mid-market and small cap sectors are less crowded than they once were - ironic at a time of record fundraising. Meanwhile, the marketplace for companies with annual revenues in excess of $50 million is more competitive than it’s ever been. And during a period of aggressive sideways expansion by large general partners into new strategies, we increasingly hear investors complain that they have little time to do anything more than re-up with existing relationships, most of which are focused on bigger market segments. Our message to all limited partners: using Palico avoids the ‘shoulda, woulda, coulda syndrome.’ Palico’s digital marketplace also easily and efficiently opens up a world of smaller and more specialized fundraisings to investors.

The Advantage of Scaling Up With a Fund Manager

Over time, of course, successful general partners running smaller funds tend to become larger general partners running bigger funds. A small, but significant subset of these managers experience the kind of explosion in demand over time and across fund generations that makes it difficult for investors to access their later, larger vehicles. This is yet another reason why limited partners - even the biggest - should maintain investment programs for smaller managers.

Small Funds and Specialist Funds May do Best in a Downturn

A particularly interesting academic paper that came out late last year indicates that PE-owned companies do better than non-PE-backed firms of similar size, purpose and profitability during downturns - a topic with plenty of relevance for fund managers and investors, given a near-record run of uninterrupted economic growth in the world’s major economies. In light of today’s record purchase price multiples, smaller funds, frequently specialists in uncrowded niches, or purchasers in the relatively neglected lower end of the buyout market, may do better than their larger counterparts in a downturn. Yet another reason why limited partners should consider smaller funds today.

Alternative PE - From the Four Corners of the Earth - is Palico’s Speciality

Helping smaller, harder-to-find funds standout is Palico’s speciality. Fund offerings with an investment focus covering 179 of the world’s 195 countries are listed on Palico, with more than four out of five vehicles focused on investing in the particularly inefficient small cap and lower mid-market corporate sectors. Additionally, two out of five operate in specialist sectors including agriculture, credit, timber, mining, water, shipping and intellectual property; and another two out of five focus on newer regions for private equity investment in Asia, the Middle East, Africa, and Latin America. A majority of secondaries sold on Palico involve funds that raised $250 million or less from investors. Some 80 percent of transacted secondaries are for stakes worth $10 million or less - what we call ‘small secondaries.’

$227 Million Invested via Palico

In 2017 limited partners invested $227 million in primary fundraisings and secondaries via Palico’s digital marketplace, overwhelmingly in smaller and more specialized funds. As average fund size grows amidst a record number of fundraisings, Palico’s digital marketplace helps primary fundraisings and small secondary offerings standout. Palico is making private equity ‘alternative’ again.

"Palico’s marketplace is a particularly valuable means of discovery in an industry where traditional fundraising frequently falls short."

Palico’s digital marketplace is the first venue that makes it easy to buy and sell small secondaries, these are stakes of $10 million or less, sold by limited partners after fundraising has closed (typically once the fund is largely invested, making it possible to evaluate return prospects with greater certainty). Small secondaries tend to get overlooked by the large, multi-billion dollar specialist funds that dominate the secondary market. The reason: Small stakes frequently require as much time to evaluate as considerably larger stakes, making them inefficient opportunities for larger funds. Palico puts LPs - of all types and sizes - interested in the secondary market directly into contact with each other. It’s a second hand shop where LPs who are not experts in this market can sell what they want and find exactly what they want, no matter what the size of the fund stake.

Palico’s Secondary Listings

Four out of five second-hand fund transactions initiated in Palico’s digital marketplace revolve around offers for private equity fund stakes worth $10 million or less. Some 45 percent of secondary transactions on Palico involve stakes of $5 million or less. In the six years since Palico’s digital PE fund marketplace launched, stakes with a combined net asset value of $451 million have been listed on the platform, covering an ever-expanding range of strategies from buyout to credit.

The Appeal of Selling and Buying Secondaries Online

Apart from specialists who have the requisite resources and connections, secondary selling and buying can be difficult. But on Palico, information from sellers is anonymously transmitted to buyers who’ve already expressed an interest in the fund or funds via wishlists. After receiving bids, sellers only reveal their identity to potential buyers if they choose to do so. For secondary buyers, Palico offers hard-to-find dealflow - and frequently hard-to-find funds - in just a few clicks.

Half of Palico’s Secondary Sales are for Smaller Funds

Some 50 percent of secondaries transactions on Palico involve funds that raised $250 million or less from investors. These smaller funds tend to focus on relatively neglected, and potentially attractively priced, small cap assets. They also frequently specialize in niche investment areas and in newer geographies where there’s less competition.

$227 Million Invested via Palico

In 2017 limited partners invested $227 million in primary fundraisings and secondaries via Palico’s digital marketplace, overwhelmingly in smaller and more specialized funds. As average fund size grows amidst a record number of fundraisings, Palico’s digital marketplace helps harder-to-find primary fundraisings and small secondary offerings standout, bringing them to the desktops and smart devices of interested investors the world over. Palico is making private equity ‘alternative’ again, even as the overall industry becomes mainstream.

"With Palico, we discover smaller and midsized fundraisings from outside of the mainstream and from outside of the world’s major financial hubs."

Out of nearly 300 opportunities currently listed in Palico's marketplace, more than 40 percent are first-time fundraisings. The vast majority of those funds are run by private equity veterans creating their own firms from scratch. Among these, many were founded by teams of highly experienced managers coming together for the first time from disparate fund groups. Yet two out of five are spinoffs, run by exceptionally close-knit teams that have been investing together for years and who have collectively broken free from larger organizations. The average first-time fund is now outperforming the average later-generation fund, but spinoffs - due to their demonstrated cohesiveness - generate some of the greatest excitement among investors.

Palico's Rich Range of Spinoffs

Palico is not only a great place to find first-time private equity funds, it's a mecca for investors seeking to commit to promising spinoff teams. As erstwhile subsets of larger teams, spinoff groups are frequently specialists, active in less crowded sectors than the historic core of private equity - buyouts. Indeed, only 11 percent of Palico's spinoff fundraisings are focused on the buyout market. The variety of spinoff strategies on Palico includes private credit, turnaround, real estate and a host of growth niches. A third of Palico's spinoff fundraisings are also focused on emerging markets, far from the world's highly competitive money centers.

Bringing Alternative Private Equity to Investors

In today's mature private equity fund market, where a record 3,129 funds are seeking capital - some 42 percent more than just five years ago - it can be hard for limited partners to find the time to source and evaluate promising spinoffs, let alone the broader universe of first-time funds. Yet Palico's digital marketplace brings a wide choice of promising smaller and specialized managers of all types to the desktops and smart devices of limited partner firms in every region of the world. In 2017, those LPs invested $227 million in primary fundraisings and secondaries via Palico's digital marketplace, overwhelmingly in smaller and more specialized funds. Palico is making private equity 'alternative' again, even as the overall industry becomes mainstream.

"It's great to push a button and see everything that's out there. Palico helps me do my job better."

It’s difficult to tell how serious the threat of multiplying trade barriers will become for world commerce after an executive order mandating punitive U.S. tariffs on steel and aluminum imports was signed by President Trump a week ago. The Trump administration is holding out the possibility of selective exemption, dependent, it would seem, on negotiations with U.S. trade partners. But whatever the fallout, international private equity investment will continue. And with markets becoming more volatile, investors will seek out - in growing numbers - off-the-beaten-path private equity investments, or those that show the least correlation with the global macro economy.

Alternative PE - From the Four Corners of the Earth - is Palico’s Speciality

That’s just what Palico’s digital marketplace for private equity fundraisings and secondaries specializes in. Fund offerings with an investment focus covering 179 of the world’s 195 countries are listed on Palico, with more than four out of five vehicles focused on investing in the particularly inefficient small cap and lower middle market corporate sectors - far from the world of major indexes. Additionally, some 40 percent of the funds in Palico’s marketplace focus on specialities, covering everything from litigation finance to water technology, with the vast majority intended to show little correlation with the direction of the macro economy. A majority of secondaries sold on Palico involve funds that raised $250 million or less from investors - again hitting that uncorrelated, micro investing sweet spot.

$227 Million Invested via Palico

In 2017 limited partners invested $227 million in primary fundraisings and secondaries via Palico’s digital marketplace, overwhelmingly in smaller and more specialized funds. As average fund size grows amidst a record number of fundraisings, Palico’s digital marketplace helps off-the-beaten path fundraisings and secondary offerings in smaller funds standout, bringing them to the desktops and smart devices of interested investors the world over. Palico is making private equity ‘alternative’ again, even as the overall industry becomes mainstream.

"Palico's marketplace offers a great way to connect with GPs. It allows us to cast a very wide net for investments, which is necessary in today’s private equity market."

With fund-size records quickly achieved, only to be quickly broken in recent months, and as the average fund becomes ever-bigger (the typical PE vehicle has nearly doubled in size in the last six years to $1.3 billion), many private equity professionals expect their returns to shrink somewhat, increasing the appeal of the proverbial ‘road less traveled’ in our industry - investing in funds in uncrowded specialities and in the relatively neglected lower end of the buyout market.

The Emergence of Barbell Investing - Big Funds for Beta and Small for Alpha

Indeed, larger funds competing against each other for assets are likely to have a tougher time producing the kind of outsize returns for which private equity is justly celebrated. Today’s behemoths do, however, offer the opportunity to put exceptionally large amounts of money to work in one go, an advantage at a time when investors are loath to let capital earmarked for PE investment lie fallow in exceptionally low yielding investments. Given the simultaneous popularity of large and small funds, a barbell investing style is rapidly developing, with limited partners looking to commit large sums to big funds, but seeking a bigger bang for their buck by investing lesser amounts in those smaller, frequently sector-focused funds and emerging managers found on the road less traveled - what Palico dubs alternative PE.

Bringing Alternative Private Equity to Investors

In today’s mature private equity fund market, where a record 3,129 funds are seeking capital - some 42 percent more than just five years ago - it can be hard for limited partners to find the time to source and evaluate smaller managers. In fact, LPs these days actually find little time to do anything more than re-up with existing relationships, given the aggressive sideways expansion of large general partners into new strategies. Yet Palico’s digital marketplace brings a rich choice of promising smaller and specialized managers to the desktops of over 1,500 limited partner firms in every region of the world. Palico provides over-taxed LPs an efficient means to evaluate, analyze and invest in new GP relationships.

Palico’s Listings

Four out of five fund managers raising capital on Palico are seeking $250 million or less, intending to focus on relatively neglected and potentially attractively priced small cap assets; three out of five qualify as emerging managers, i.e. those raising their first or second fund - though most have previous experience at larger funds; two out of five operate in specialist sectors including agriculture, credit, timber, mining, water, shipping and intellectual property; and another two out of five focus on newer regions for private equity investment in Asia, the Middle East, Africa, and Latin America. Listings in Palico’s secondary market are dominated by small secondaries - stakes of $10 million or less in funds that have finished fundraising and are already investing. Palico is making private equity ‘alternative’ again, even as the overall industry matures. In 2017 limited partners invested $227 million in primary fundraisings and secondaries via Palico’s digital marketplace, overwhelmingly in smaller and more specialized funds.

"Palico’s marketplace is a particularly valuable means of discovery in an industry where traditional fundraising frequently falls short."

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